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BILL NYGREN IS NOTHING IF NOT LONG ON HOPE. He's a Chicago Cubs fan -- and thinks the stock market is cheap, even after a 70% rise off its 2009 lows.

"Although it feels like we are in a different world from a year ago, investor pessimism is as strong as it was then," says the well-respected value investor. "Yet if you take away financials, the yields in the stock market are unusually high compared to the bond market." Equities, he notes, tend to outperform bonds over time, and that hasn't changed.

Nygren believes that the stock market's still cheap, based on yield levels.
Roark Johnson for Barron's

The stock market's low last March was irrational, says Nygren, 51 years old. "Most of the time, we are buying stocks at 60% of what we think they are worth and selling them at 90%. Last March we were selling at 60% of what they were worth and buying at 40%," he explains.

Nygren, who co-manages the $3.5 billion Oakmark Fund (ticker: OAKMX) with Kevin Grant, started feeling the heat from the meltdown earlier than rivals, since the fund owned a lot of financial names. Among them was Washington Mutual, seized by the government in 2008 and most of its assets sold to
JPMorgan Chase.
jpm 0.35615994819491664%JPMorgan Chase & Co.U.S.: NYSEUSD61.99
0.220.35615994819491664%
/Date(1425419942240-0600)/
Volume (Delayed 15m)
:
11354794
P/E Ratio
11.367647058823529Market Cap
230297894992.819
Dividend Yield
2.5873221216041395% Rev. per Employee
406463More quote details and news »jpminYour ValueYour ChangeShort position
Oakmark lost 3.64% in 2007, and a humbling 32.61% in 2008. Assets under management had shriveled 49% to $2.5 billion by '08's end.

Everything turned around in 2009 as Oakmark roared back with a 44.77% gain. For the 12 months through March 31, it's up 70.07%, against a 49.77% rise for the Standard & Poor's 500. Over five years, Oakmark is up 3.57% a year on average, while the S&P is up 1.92%. And for 10 years, the fund's annual gain of 7.33% easily beats the 0.65% decline for the S&P. That puts it ahead of 99% in its large-cap-blend category.

"There were concerns about the CEO's [Steve Jobs'] health, and that Apple's products, which tend to sell at premiums to competitors', wouldn't do well in a recession. It was selling at $80 a share with $30 in cash. Stripping out the cash, it was selling at about 10 times earnings," he says. Apple more recently traded at 235.

Nygren's value education began early. "I grew up in a middle-class family, and my mother was always sensitive to expanding the purchasing power of a limited budget," he says. "That meant going to multiple grocery stores for specials, and buying more of something when it was on sale," he recalls.

After earning a bachelor's of science in accounting from the University of Minnesota (1980) and a master's in science in finance from University of Wisconsin, he worked as an analyst at Northwestern Mutual Life Insurance Company in Milwaukee. He joined Chicago's Harris Associates (advisor to Oakmark) as an analyst in 1983, rising to research director in 1990 and manager of Oakmark Select Fund in 1996. In 2000, he added responsibility for the Oakmark Fund.

As a bottom-up stock picker, he invests in companies that trade at significant discounts to his estimate of underlying value based on free cash flow and competitive position. He particularly likes outfits run by managers who think and act as owners.

One favorite is Liberty Media (LINTA), whose main asset is QVC. The TV merchandiser has evolved from early days hawking cheap jewelry to selling more expensive wares to more affluent customers in the U.S. and, increasingly, abroad, via the Internet.

"The company has a healthy free cash flow, and earnings are understated because of all the goodwill [the dollar amount over book value paid for an asset] generated when Liberty bought the company from Comcast," he says. Nygren is estimating that reported earnings are only half of cash earnings, because of goodwill.

Oakmark's cost basis for its Liberty shares is in the midteens, although it fell to around 2 in 2008 before climbing back to about 15. "We didn't give up on it," he says. Consensus estimates put 2010 earnings at 69 cents a share, rising to 88 cents in 2011.

Another of Nygren's misunderstood stocks is
H&R Blockhrb -1.4185434337525593%H&R Block Inc.U.S.: NYSEUSD33.705
-0.485-1.4185434337525593%
/Date(1425419943002-0600)/
Volume (Delayed 15m)
:
1659034
P/E Ratio
19.776470588235295Market Cap
9407993517.07276
Dividend Yield
2.379535990481856% Rev. per Employee
34442.9More quote details and news »hrbinYour ValueYour ChangeShort position
(HRB). Wall Street thinks its tax outlets have lost customers to TurboTax, but the people who use the online system never went to professional preparers in the first place, he asserts.

Rather, he believes H&R Block has been hurt by the weak economy because more people either don't file -- because their income is too low -- or because they can't pay the taxes. (H&R estimates IRS filings are down about 5% through Feb. 28.) As the economy recovers, people will start filing again. Taking splits into account, his cost basis is about 10. The stock trades at 17.80. Analysts estimate 2010 earnings at $1.42 and 2011 at $1.59.

Canada's
Cenovus Energy
(CVE) is a pick in part for its shareholder-friendly management. Spun off late last year from EnCana (ECA.Canada), Cenovus has oil-sands projects in Alberta.

"It isn't well covered yet. We think it is a significantly superior business because of lower costs, and yet it is being priced at a discount to where other oil-sands businesses sell," he says. Once the price of oil goes above $40 a barrel, profits go up sharply, but costs don't, Nygren notes. Oakmark started buying the stock late last year in the low 20s; it was recently above 26. This year's earnings could be $1.59, with $1.62 expected in 2011.

Typical of Nygren's style is his interest in Comcast (CMCSK), the nonvoting shares of Comcast (CMCSA). "The stock got hit because 80% of [investor] focus is on 20% of the value," he says, referring to Comcast's buying a controlling stake in NBC Universal for more than $13 billion.

It "looked like a big, stupid deal. But when you dig into the terms, Comcast doesn't have to pay anywhere near that. GE is paid by pulling out earnings over a long period of time," he says. The real value is in the cable units like USA Network and CNBC. "The cable networks make money. NBC loses money," says Nygren. Earnings could hit $1.23 in 2010, and $1.37 in 2011.

The shares haven't moved much, but Nygren believes Comcast will successfully cut costs, making NBC profitable.